WASHINGTON - A group of 15 small-business owners gathered on the steps of the U.S. Treasury last week to protest the department's insistence on collecting stiff prepayment penalties for loans made in the early 1980s under a Small Business Administration program.
"The federal government is a loan shark," said Harry Whittelsey, president of an Islandia, N.Y., telecommunications firm that employs 55 people. Mr. Whittelsey borrowed $360,000 at an 11.75% interest rate in 1983. He now wants to clear his outstanding $199,000 balance, but faces a $78,000 prepayment penalty.
Facing Stiff Penalties
The 503 loan program, which ran from 1979 through 1986, provided small businesses with 20- to 25-year loans with fixed interest rates ranging from 11% to 15.7%.
Borrowers now want to refinance their debt at more attractive rates, but the Treasury imposes stiff prepayment penalties, in some cases up to 40% of the principal.
The Federal Financing Bank, an arm of the Treasury, financed the loans through local development companies.
Small-business owners say the provision stifles growth and job creation.
The Treasury has said taxpayers stand to lose up to $70 million if the department accommodates the small-business owners.
"It will cost them a lot more if we don't expand and create jobs," countered Mr. Whittelsey, calling the Treasury's projections "phantom income."
Doris M. Johnson, president of a Vancouver, Wash., industrial fastener and supply company, established a grass-roots movement, the SBA-503 Small Business Coalition, last year to protest the prepayment provision.
The coalition represents about 3,700 small businesses that employ about 200,000 workers. In all, these companies have $650 million outstanding in SBA 503 loans, according to an SBA spokesman.
The prepayment clause is in tiny print and worded in such obscure language that even lawyers failed to grasp its meaning at the time it was written, according to Mrs. Johnson. She said she borrowed $176,000 at 12% in 1984 and faces $50,000 in prepayment penalties.
In 1986, the SBA established a program allowing for lower prepayment penalties. The coalition wants the Treasury to apply those provisions to 503 borrowers.
Legislation to that effect is now pending in Congress. But last year, two similar bills died in committee.
Meanwhile, bankers and the SBA say they sympathize with the borrowers' plight.
"The Treasury has to ask itself whether it's worth this little bit of a fiscal fit, when those companies are well-disposed to expand and create jobs," said Steve Verdier, senior legislative counsel at the Independent Bankers Association of America.